Crash!

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Re: Crash!

Postby Dacamic » Tue May 26, 2009 2:32 pm

During the past five months the S&P 500 created a V-shaped "bottom" with a 27% decline followed by a 35% rise, each lasting 2 1/2 months. The word "bottom" is presented in quotes because -- as I've droned before -- I don't expect the low point plumbed in March to be the ultimate bottom for this secular bear market. The broad equity market nonetheless had a downward swoon and an upward spike within a five-month period that would be impressive by themselves for an entire year, let alone during such a short timespan.

The S&P 500 hit 930 within this up cycle a few weeks ago, and that high will probably be surpassed this week; regardless, it looks like equities will take a breather during the first half of June. After that pause, the major indexes look poised to resume their upward jaunt during the summer (contrary to the old saw "sell in May and go away"). I suspect the ride will be choppier during the next three months than it has been since mid-March, yet the overall trend will slope up.

When Fall draws near, Boz Scaggs might again become relevant by singing one of his hits: Breakdown Dead Ahead. I plan to wait a couple months, though, before digging through my vinyl collection to find an appropriate anthem for the fourth quarter of this year (if you couldn't already tell, it is my guess an upbeat tune won't fit the bill).
Steve
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Re: Crash!

Postby Overload » Tue May 26, 2009 4:26 pm

Is all of this still following the 1930s pattern? If so, does the historical comparison provide any indication of the severity of the drop come fall?

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Re: Crash!

Postby ovtrading » Tue May 26, 2009 4:28 pm

If you want a comparison to the 1930s chart check http://dshort.com/, he updates the '4 bad bears' chart regularly.
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Re: Crash!

Postby Dacamic » Wed May 27, 2009 12:49 am

Overload wrote:Is all of this still following the 1930s pattern?

Indeed it is; thus, the equivalent point to today in that earlier pattern is June 1938.

If so, does the historical comparison provide any indication of the severity of the drop come fall?

An exact re-creation of the 1930's pattern would produce about a 20% decline in the S&P 500 from October 2009 to March 2010 (on a monthly-close basis).
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Re: Crash!

Postby Dacamic » Wed May 27, 2009 12:58 pm

ovtrading wrote:If you want a comparison to the 1930s chart check http://dshort.com/, he updates the '4 bad bears' chart regularly.

Until recently I would have disagreed with the charts presented in the referenced link because they did not include March 2000 - October 2007 for the S&P 500. A couple days ago, though, the author changed his charts to include that seven-year period, which I believe creates a more correct comparison to the 1930's.

I've not made time to include Nikkei data, and so appreciate seeing a chart that has it. There is a divergence on the horizon between the "1930's" Dow and the Nikkei. If resolved in favor of the latter, the up trend beginning in March 2009 will continue until September 2010 (rather than end this Fall as suggested in my post yesterday). Either way the outlook doesn't appear favorable for Bulls in 2011 or 2012.
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Re: Crash!

Postby Dacamic » Fri Jul 17, 2009 1:51 pm

As shown in the chart below, the S&P 500 index continues to roll on a road it has traveled before.

The second stage of the prevailing bull cycle -- which began a few days ago -- started about three weeks later than I expected, and now appears ready to run further into Fall than previously forecast. My lack of precision notwithstanding, yesterday (1930's) and today (2000's) still march in parallel. Their persistent in doing so would bring the upcycle (that began in March) to its top around Halloween.
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Re: Crash!

Postby Overload » Sat Jul 18, 2009 9:17 am

That's a pretty impressive comparison. I was hoping to see where things go over the next 10 years or so, but my data doesn't go back that far. What's the crystal ball say?

Pete
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Re: Crash!

Postby Dacamic » Sat Jul 18, 2009 12:49 pm

If now (2009 - 2019) continues to resemble then (1938 - 1948), there will be a couple interesting trends to trade during the next ten years (as shown in the chart below).
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Last edited by Dacamic on Mon Jul 20, 2009 1:05 pm, edited 1 time in total.
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Re: Crash!

Postby Overload » Sun Jul 19, 2009 12:36 pm

This hasn't specifically been discussed in this thread, but I've often wondered about the effect of WW2 on "then". WW2 is often credited with pulling the US out of the 1930s recession, and the 240% gain mentioned in the middle of your last chart appears to coincide quite nicely with VE and VJ days. Looking at the charts thus far, I'm hesitant to say "this time it's different". Yet at the same time, I have a hard time believing that investments in alternative energy are going to result in the same economic boom seen at the end of WW2.

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Re: Crash!

Postby Dacamic » Mon Jul 20, 2009 1:09 pm

With sincere apologies, I must confess to an error in the chart I posted most recently. The rise from mid-1942 to mid-1946 is 140%, not 240% as previously shown. The chart has been edited to show the correct value.

Factual errors of that nature drive me crazy. I shall return to offer thoughts about Pete's observations after finishing thumping my head on the desk.
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Re: Crash!

Postby Dacamic » Mon Jul 20, 2009 5:32 pm

Overload wrote:This hasn't specifically been discussed in this thread, but I've often wondered about the effect of WW2 on "then". WW2 is often credited with pulling the US out of the 1930s recession, and the 240% gain mentioned in the middle of your last chart appears to coincide quite nicely with VE and VJ days. Looking at the charts thus far, I'm hesitant to say "this time it's different". Yet at the same time, I have a hard time believing that investments in alternative energy are going to result in the same economic boom seen at the end of WW2.

The S&P 500 rose at an impressive 24% annual rate from mid-1942 to mid-1946. Fundamentals, though, do not provide adequate explanation for that mega-bullish performance. During those four years GDP grew 7% annually, yet S&P 500 earnings fell 4% annually. I can only speculate why the S&P 500's PE ratio would jump from 8 to 22 during a time of extraordinary uncertainity. If I were to guess, higher employment combined with a higher savings rate created liquidity that wandered into equities, initally because valuations were attractive.

A 40% decline in the S&P 500 by 2013 -- to reflect a similar change from late-1939 to mid-1942 -- would probably bring its PE to single digits. In such case equities would be setup for decent price appreciation during the following years.
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Re: Crash!

Postby Dacamic » Thu Oct 01, 2009 1:02 pm

-- All good things must come to an end --

With due respect to Chaucer, I prefer the above saying in context of "Star Trek: The Next Generation" -- in its series finale -- when Q tells Jean-Luc Picard that humanity is about to vanish into oblivion. Present-day circumstances are not equally dire, barring a universe-ending battle raging in a galaxy far, far away unbeknownst to us; nonetheless, the quoted musing of Chaucer and Q seems relevant if one believes (which I do) that we are in the dwindling days of equities' prevailing bull cycle.

The bull has lifted equities significantly higher from lows plumbed in early March:

    S&P 500 -- 56%
    NASDAQ 100 -- 66%
    Russell 2000 -- 76%
    Value Line Geometric -- 96%.
As you might suspect, the S&P 500's winning streak this year is among the best during the past 100 years (the best is an 80% spike in four months in 1933). Alas, this impressive up cycle will end within a few weeks if equity prices continue to match patterns set in the 1930's; accordingly, I am looking for a place (or time) to soon shift my bias from long to neutral. Market action during the past couple weeks looks a tad toppy, yet I wouldn't be surprised to see the S&P 500 nudge 1100 before beginning its expected march South. Whether or not it does, the bull is likely to leave the arena this month ... assuming he didn't already leave in September without even bothering to say "Beam me up, Scotty".

The looming down cycle (or, if you are a short-only trader, the eagerly-anticipated down cycle) will be about five months long and pull equity prices at least 20% lower -- on a monthly close basis -- based upon the comparative period in the 1930's (December 1938 - April 1939).
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Re: Crash!

Postby Overload » Thu Oct 01, 2009 4:29 pm

Thanks Steve. You've been dead-on through this whole thing, so I think there's good reason to trust your advice. I've been seeing some warning signs recently as well, so it's probably not a coincidence that you posted this warning now.

Changes in market conditions can create havoc for system traders, so StrataSearch users should beware. Specifically, if your trading systems haven't been tested and approved for use in bear or neutral markets, be prepared to put them on hold if such conditions prevail. Likewise, if you've been building a system with historical data exclusively from 2009, and you're about to start trading that system live, you should pay very close attention to the potentially changing conditions. It may be too late to get in on the 2009 bull market, and attempts to do so could create losses.

All is not lost, however. In fact, the volatile conditions that appear with market tops and the fast movements of a bull market can lead to some great trading opportunities. StrataSearch users that aren't interested in making short trades may want to explore reverse ETFs. These unique instruments allow you to profit from long trades, even though the market is heading south, and they're traded just like stocks.

Regardless, there are definite signs that we're entering a period of uncertainty. Watch your systems closely.

Pete
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Re: Crash!

Postby Dacamic » Thu Dec 17, 2009 1:38 pm

"When the facts change, I change my mind. What do you do, sir?" John Maynard Keynes

Responding to Keynes’s quoted question, confusion is my usual reaction to changed circumstances. When clarity -- and composure -- return, I fall back on a couple tools often found in a trader’s war chest: denial and hope.

As guessed it might, the S&P 500 moved to 1100 in October, and I accordingly changed my bias from long to short in mid-October (with only a few days in-between at neutral). The S&P 500 obligingly dropped 6% to close out that month, an action supposedly signaling the bull cycle’s end. On Halloween I was reasonably comfortable equity prices would move broadly lower for several months.

Well, as we now know, the S&P 500 returned to the 1100 neighborhood in November, giving me a Keynesian challenge regarding the pattern match between then (1930’s) and now (2000’s). As implied earlier I met this unexpected reality with confusion, while keeping denial and hope temporarily, but barely, at bay. Admittedly, my befuddlement still somewhat lingers while the S&P 500 lollygags in a lengthy, narrow range between 1085 and 1110 (with exception of a one-day pop higher a couple days ago).

If I were to offer a guess, U.S. equities are now rhyming with the past of seventy years ago, rather than repeating it. In other words, the bull cycle indeed might have ended in October, but equity prices are “chopping” instead of “dropping”. As shown in the chart below, it’s also possible the up-cycle simply is running a couple months more than expected, forestalling price declines until after year-end. Or, maybe the long-lived pattern match we’ve tracked in this thread is beginning to unravel and the up-cycle is only temporarily stalled.

For what it’s worth, I’ve not seen enough technical evidence – or suffered sufficient deterioration in my equity curve – to sway me from my short bias. With that in mind, I expect the S&P 500 to break lower beginning in January … and the pattern match to remain intact as “now” continues to approximate “then”.
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Re: Crash!

Postby Overload » Tue Jan 05, 2010 6:00 pm

Steve, you apparently aren't alone in your lack of clarity:

http://www.nytimes.com/2010/01/05/business/economy/05econ.html

Whenever these kinds of articles start appearing, it confirms that we're in a risky period of unknown direction. This isn't to say that money can't be made, but it becomes more akin to a coin-flip than a technical evaluation of probabilities. As I always say in these periods, traders should watch their systems closely.

Pete
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